U.S. Court of Appeals for the D.C. Circuit Upholds FCC’s April 2011 Pole Attachment Order

In a significant victory for cable and telecommunications providers, today the U.S. Court of Appeals for the District of Columbia Circuit, in a unanimous opinion, upheld the FCC’s April 2011 decision (2011 Pole Order) lowering telecommunications pole attachment rates to more closely align with rates paid by cable television attachers on poles subject to FCC regulation (prior advisory). The decision is another important step in the implementation of the FCC’s 2010 National Broadband Plan’s recommendation to establish rental rates for pole attachments that are as low and close to uniform as possible to promote broadband deployment. As explained below, the Court’s decision strongly reinforces the FCC’s broad discretion under the federal Pole Attachment Act to define the term “costs” in setting pole rates limited by a pole owner’s recovery of at least its incremental costs.

In addition, the Court upheld the 2011 Pole Order’s determination that Incumbent Local Exchange Carriers (ILECs) are protected by the Pole Attachment Act so that the FCC can establish “just and reasonable” rates, terms, and conditions for ILEC attachments to utility poles on a case-by-case basis. Finally, the decision upheld the FCC’s extension of the refund period for attachers who are charged excessive rent by pole owners up to the applicable statute of limitations rather than from the date a complaint is filed with the FCC.

Background
Today’s victory represents a remarkable turnaround from the FCC’s 2007 Notice of Proposed Rulemaking (2007 NPRM) in which it initially proposed that pole attachment rates for cable providers offering broadband (virtually all cable operators) be increased to the higher telecommunications rates governed by Section 224 (e) of the Pole Act. This proposal would have increased cable attachment rents substantially while imposing an unjustified “broadband tax” on cable providers contrary to national policies to promote broadband deployment and competition.

Following substantial input from the cable industry and other attachers criticizing the negative implications of the 2007 NPRM, the FCC proposed more broadband friendly pole rate rules in its 2010 Order and Further Notice of Proposed Rulemaking (2010 Further Notice), which aligned with the objectives and recommendations of the FCC’s 2010 National Broadband Plan. The FCC’s 2011 Pole Order reinterpreted Section 224(e) of the Pole Act to lower rents paid by telecommunications attachers (Telecom Rate) to eliminate the disparity with cable attachers in order to “significantly reduce the marketplace distortions and barriers to the availability of new broadband facilities and services that arose from disparate rates.” The FCC achieved this by reinterpreting the term “cost” in Section 224(e) to establish a range of attachment rates with incremental costs at the low end and 66% or 44% (for urban vs. rural poles) of the fully allocated cost of attachment at the high end of the range. The applicable rate in most cases is the high end of the range which produces Telecom Rates at or near the cable rate.

A group of electric utilities appealed this reinterpretation of Section 224(e) to the DC Circuit in May 2011. These parties argued that the FCC exceeded its statutory authority by deviating from its original interpretation of Section 224(e) following its adoption in 1996 that the telecommunications formula must be based on the fully allocated costs of the pole with a special calculation related to unusable space. The appeal was argued on Jan. 23, 2013 with today’s decision following just 34 days later.

The Telecom Rate Decision
The decision unanimously held that the FCC was well within its authority in reinterpreting the Telecom Rate and was entitled to judicial deference. As the Court explained, Section 224(e) directs that in establishing rates for telecom attachers, pole owners must apportion the “cost of providing space on a pole” for usable and unusable space in following certain criteria. However, Section 224(e) does not define what the term “cost” means (unlike under the cable formula which specifies a range of costs from incremental cost to fully allocated cost). The Court referred to well settled precedent that an agency has broad discretion to interpret the word “cost” when it is not defined by statute. As explained by the Supreme Court “[t]he fact that without any better indication of meaning than the unadorned term, the word “cost”…is a “chameleon”…a virtually meaningless term.” Accordingly, the Court determined that the reinterpretation of cost to mean 66%/44% of the fully allocated cost, as applicable, was well within the FCC’s discretion.

The Court also determined that the FCC fully explained the reasoning behind its reinterpretation of the Telecom Rate (as required under canons of administrative law) citing to the need to “eliminate distortions in end–user choices between technologies,” to allow telecom provider behavior to be “driven more by underlying economic costs than arbitrary price differentials” and to reflect “a national interest in continued pole investment.” The utilities did not rebut the FCC’s policy determinations and “offer neither theory nor fact to contradict the Commission’s fundamental proposition.”

In approving the FCC’s specific reinterpretation of the Telecom Rate, the decision provides the FCC broad latitude for establishing identical cable and telecom attachment rates as low as incremental cost. Although the utilities complained that the new telecom formula was “nothing more than an algebraic sleight of hand designed to conflate the two rates,” the Court stated that the “Commission expressly justifies its current policy in terms of eliminating the differences between the cable and telecom rates (subject, of course, to complying with §224(d)(1)’s lower bound [i.e. incremental cost]).”

The ILEC Decision
Prior to the passage of the 1996 Telecommunications Act, only cable television providers could enjoy the protections afforded by the Pole Act for attachments to poles owned by ILECs and electric utilities. ILECs (and other telecommunications providers such as CLECs) generally had their own unregulated agreements covering their attachments to electric utility poles. With the passage of the 1996 Act, Congress amended the Pole Act and added attachments by “telecommunications providers” to the protections of 224 and also added that “telecommunications carriers” could demand access to poles at rates set under the telecom formula. The 1996 Act’s amendments to the Pole Act also excluded ILECs from the definition of telecommunications “carriers” and relying on that provision, the FCC excluded ILECs from all protections of the Pole Act. On Petition by the ILECs, in the 2011 Pole order the FCC eliminated that blanket exclusion and determined that ILECs, while excluded from the definition of telecommunications “carrier” and thus not eligible for mandatory access or the telecom carrier rates, found that ILECS were nonetheless telecommunications “providers” and thus ILEC attachments were within the definition of pole attachments subject to regulation by the FCC. This granted ILECs the right of FCC review of ILEC pole agreements with electric utilities to insure that the rates, terms and conditions of such agreements were “just and reasonable.” While ILEC attachments are not expressly subject to the 224(e) telecom rates or mandatory access, the FCC determined to hear challenges by the ILECs to rate, terms, and conditions in ILEC pole agreements with electric utilities on a case-by-case basis.

The D.C. Circuit upheld this change, even noting that “we very much doubt if the prior interpretation [excluding ILECs] was reasonable.” Accordingly, ILECs may seek review at the FCC of its pole attachment agreements with electric utilities in much the same manner as cable operators and other telecommunications providers.

The Refund Decision
The 2011 Pole Order also extended the refund period available to attachers who have been overcharged for pole rent. Prior to the rule change an attacher could generally recover overcharges only back to the date of the rate complaint. The new rules allow the FCC to order the refund of overcharges prior to the filing date consistent with the applicable statute of limitations period. The Court summarily rejected the pole owners’ challenge to the new rule based on the broad authority given to the FCC to regulate pole attachments and to enforce complaint decisions under Section 224(b)(1). The Court explained that although the new rule “reverses decades old Commission policy” the FCC had adequately explained the basis for its change in policy, specifically that the old “system gave parties a ‘disincentive to engage in pre-complaint negotiation,’ as doing so would cut the complainant’s recovery period short.” Accordingly, the Court concluded that the FCC had satisfied its “modest demands for changing policy” and upheld the new rule.

Multiple lawyers at Davis Wright Tremaine participated in all phases of the NPRMs and D.C. Circuit proceedings, as well as a myriad of other pole attachment rulemakings, adversary proceedings, and inquiries at the FCC as well as similar proceedings before state PSCs in those states certified to regulate pole attachments. Please contact us if you would like any further information or updates.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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